Sensex and Nifty50 explained in an easy way

Brand Wars
9 min readJan 3, 2022

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Image source: VRDNation

In this article, We will talk about Sensex and NIFTY50
First of all, we will understand its concepts and what they are exactly

after that, we will try to understand why people are so obsessed with NIFTY and Sensex. And why so many people follow them.

Many times people ask that suppose if Sensex is the index of 30 companies then those 30 companies should be affected have invested in a particular company so why does my stock get affected? No, it’s not like that at any time, a sentiment of the market called group psychology. You must have heard a proverb “all ships rise with the rising tide “So when there is high tide, all the ships rise with it. And with the low tide, all the ships also go down. Similarly, if the Sensex or the market does very well, then sometimes bad companies also rise with it. And sometimes when the Sensex goes down, many good companies also go down. And in that, it becomes very important for you to analyze.

So we talk about analysis on this Blog, and in this article, we will understand the concept of Sensex and NIFTY better. And so that you have a better understanding of sentiment and group psychology. So let’s understand Sensex and NIFTY with an example. I give you an analogy, suppose, your health worsens, then you go to the doctor, the doctor checks your temperature, checks your blood pressure or the doctor asks you to bring your blood report or to check your blood sample.

Similarly, if you want to find out the country’s economic health then you can track the stock markets of that country. Now how to track the stock market we talk about India, you can track the market through Sensex and NIFTY. Sensex and NIFTY are the two major indexes of India. Now,
What are the Major Stock Exchange in India?

Image source: Wirally

Sensex is the index of the Bombay Stock Exchange. And National Stock Exchange’s major index is called NIFTY. Sensex is the short form of Sensitive Index And NIFTY is the short form National Fifty. In the Bombay Stock Exchange, 5000 plus companies are listed And in the National Stock Exchange, 1600 plus companies are listed. So you can not track 5000 companies if you want to know the economic health right, so what you will do? You will follow a particular index. So Sensex is the index of the top 30 companies out of all the companies listed on the Bombay Stock exchange is the index of the top 30 companies that the Bombay stock exchange select.

Now how did these top 30 companies got selected in Sensex?
It is selected by the Free Float Market Capitalization. In which all sectors are presented and the market leader and big companies of every sector are selected according to the turnover. Similarly in the NIFTY top, 50 companies get selected out of these 1600 companies which are listed on the National Stock Exchange. Out of them, the top 50 companies get selected. So the NIFTY is the index of the top 50 companies and Sensex is the index of 30 companies.

Now let’s discuss the base year you must hear that Sensex is running at 30 thousand or 35 thousand. But
when did it start? And what is its starting figure?

So we know that from the base year. Sensex was started in 1978–79 therefore the base year of it is considered in 78–79. And its value then was Rs 100. Similarly, the nifty base year is 95–96 and its base value was @1000.And if we want to understand this in more detail.

So assume the value of Sensex is 100 Rs in 1979 So on today’s date, we say the value of Sensex is around 35000 Rs in 2018. So see, how much of growth it is If you calculate its compounded annual growth rate So it will be approximately more than 16% Every year it has given the return of 16% So in 1980, it was 116 Rs And then again 16% returns on 116 Rs, In this way, 16% will be the compounded annual growth rate of NIFTY also It was 1000 Rs in 1995–96, and today its more than 10000 Rs.
So how much will be our compounded annual growth rate? So see, Sensex covers large-cap companies It covers the top 30 companies also covers large-cap companies, top 50 companies.
But there are different sectoral indices If you want to track only the auto sector, assuming Tata Motors, Hero Moto Corp, And all these automobile companies if you want to know the condition of the auto sector Then Similarly, you can follow the auto index, power index is also published.

Bankex is your banking index Then your mid-cap and small-cap index are also published separately both Bombay Stock Exchange and National Stock Exchange Publishes their index separately in National Stock Exchange also you can follow the auto index, bank, mid-cap, small-cap if you want to track healthcare you will get power In this way, you can track different sectors So this was all about the comparison between Sensex and NIFTY.

Now we will see some salient features of Sensex and NIFTY first,

as I told you that they are calculated by the Free Float Market Capitalization method. The top 30 companies which come under Sensex Or the top 50 companies which come under NIFTY.

Free Float Market Capitalization means whatever the total market capitalization Out of one company Out of which the share of promoter or government’s share Assume there is a company of government, a semi-government company then you subtract the holdings of the promoter or government. Because the promoter or government’s holdings share does not get traded in the market So the shares which get traded in the market Their market capitalization is calculated according to that, top 30 or top 50 companies are selected Now,
What is market capitalization?
I have already written a very detailed article about that you can check the article along with that. what is the second salient feature As I told you that Sensex and NIFTY represent all the major sectors you can see all the market-leading companies, for example, if we talk about tech then you will find a company like Infosys, TCS, Wipro Then if we talk about petrochemical companies, you will find Reliance, You will find ONGC If we talk about engineering and construction then you will find companies like L&T If we talk about banks, then you will get to see a bank like HDFC companies which you will get to see in Sensex and NIFTY. After that, one more thing you should understand carefully Sensex and NIFTY are providing sentiments of the public this is not the index of government that is being published. This is a sentiment of the public buying and selling going on the daily basis according to that, this index goes up and down daily so if we say that Sensex has gone up today, assume it has gone up then you will get to see it in green this means that the bull market is going on now if you assume that Sensex is going up for a year or two then we call it a bull market if it goes down, we call it bear market whenever there is a down market, then you will get to see it in red color daily.
So if the market goes down for many days we call it a bear market and if the market keeps going up for a few months then we call it a bull market so
How the market is going up or down?
This is the sentiment of the public How are the sentiments of the public is controlled? It is controlled by the socio-political environment assume if there is a stable government, so when a stable government comes to the power with a full majority then suddenly the stock market goes up you may have seen when the Modi government came to the power with suddenly the stock market went up a full majority. In fact, when the Congress government came to the power in 2004 It was a stable government, then also the stock market went up this may also be possible that a particular government has a specific image that it is pro-business if the government supports business, then also the stock market goes up.
So it depends on the socio-political environment then how are the business policies in any country now see earlier the image of India was that there are not very good business policies Startups don’t get supported much or there are many hurdles in starting a business. So its ranking has improved a little bit In today’s date, many businesses want to come to India By that also stock markets get affected. It is very much dependent on the international affairs today’s date, the world’s markets are interlinked very much. China is selling the products in India It is selling their manufactured goods to the whole world. USA’s technology is being used by India and the whole world. So when one economy goes down, the other economies also get affected.

So what is the future of the industry In the last 25 to 30 years,

Technology has done many wonders will become the market leader similarly what will be the future of a country?
As I have told you here that a socio-political environment and the future of the country is somewhat interlinked to one another country’s future can be dependent on the resources also How are the natural resources there? is the economy agricultural dependent? are they fully utilizing their resources or not according to all these factors, the public sells and purchases stocks and if the sentiments get nasty, then the stocks are sold more And the market goes down there’s one more proverb about Sensex and NIFTY or markets generally about stock markets that markets move in excesses What is the meaning of this? When there are positive sentiments, then markets go up to 30% in a year may be possible that the earnings have gone up to only 10% And maybe the market has gone up to 30% It may be possible that people think that the government is very stable We should react, there will be more purchasing of stocks then, in negative sentiments, the market is down 20%, 30% down also it may be possible in this case also earnings have gone up by 10%. Then also if there are negative sentiments The market can go down. I will give you a real-life example of this you have surely heard of the subprime crisis Subprime crisis occurred in 2008 and 2009. In 2008, if we talk about January then the Sensex was approx 21000 And till September 2008, the Sensex came to approx 9000. So see, how much it dropped It’s not like the earnings have dropped The subprime crisis occurred in the USA, it affected India also because many companies do business among themselves So it felt like outsourcing jobs and businesses will end. So there is a very big impact of sentiments on the market.

Whoever has purchased the stocks in September 2008 They may have earned very well

returns and sells at 9000Then there is a huge loss. So I think you may have got the idea that exactly what the Sensex and NIFTY represent. See as I have told you in introductions also if you look at a company’s earnings If I give you an example of a company if there is company A, its earnings may have gone up by 50% in 2008. But it doesn’t depend on that it’s fundamentals are very strong I also agree with that but the sentiments have gone worse Its earnings have gone up to 50%. But its stock may fall by 25% This too is not a big deal. I think you have got the idea of how important group psychology and sentiment are And the Sensex and NIFTY are the sentiments of the public.

nor a government’s published index I have tried to cover all the major points in this article but then also if there is something missing or you want to add something Then you can comment it below.

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